9911796707
TMI Blog2021 (3) TMI 1230X X X X Extracts X X X X X X X X Extracts X X X X ..... ed insurance claim received, fees received for R & D activities and the said receipts would not fall within the ambit of the said clause." 3. This ground co-relates to grounds 1 & 2 raised by the revenue, which reads as follows:- "1. The CIT (A) erred in directing the AO to exclude 90% of the 'net interest income' instead of 'gross interest receipts' from the 'profits and gains of business or profession' to arrive at 'business profit' under clause (baa) for the purpose of computation of deduction u/s 80HHC particularly in view of use of expression -receipt- and not "income" in the said clause. 2. The CIT(A) erred in directing the AO not to exclude 90% of the amount on account of sale of scrap, cash discount, excise duty, octroi, C S fees, country management fees, service charges and exchange gain, from the 'profits and gains of business or profession' to arrive at 'business profit' under clause (baa) for the purpose of computation of deduction u/s 80HHC." 4. Therefore, the above grounds of assessee and revenue are taken up together for consideration for the sake of convenience and brevity. The facts relating to this issue is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is issue came up for consideration before this Tribunal in ITA No.3240/MUM/2004 for AY 2000-01 and the Tribunal vide order dated 18.3.2020 observed as under:- "10. As far as ground of appeal No.(i) of revenue is concerned, it is directed against the action of the CIT(Appeals) in treating 'other income' as part of business income of the assessee not falling within the ambit of Explanation (baa) of section 80HHC of the Act, insofar as it relates to other income, except rental income, commission, notice pay, income from cancellation of orders and miscellaneous income. In respect of the grievance projected by the revenue in its appeal, the CIT(Appeals) has in the impugned order followed his own order for the AY 1999-2000 dated 4.3.2004. The aforesaid order of the CIT(Appeals) dated 4.3.2004 was subject matter of appeal by the department in ITA No.3958/MUM/2004 for the AY 1999-2000 and by order dated 5.4.2019, the Tribunal decided the issue by holding as follows:- "20. As regards the connected ground of appeal of revenue is concerned, it is seen that the CIT(Appeals) has adjudicated this issue as follows:- "4. In so far as the issue at item No.(i) is concerned, the basis of the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt received from Gujarat Prima and miscellaneous receipt. On the other hand, in the light of the decision of the jurisdictional High Court in the case of Bangalore Clothing Co. (Supra), in respect of receipts by way of scrap, sales, cash discount, excise duty recovered, exchange rate, sales-tax refund, it has to be held that the said clause has no application. These receipts are to be taken as part of the business profits as also as part of the total turnover. Further, the exchange gain is required to be taken as part of the export turnover as well apart from being taken as part of business profits. In so far as octroi refund amount is concerned, the submission of the appellant's representative reveal that it is a refund of payment of octroi made earlier both on purchases of raw material as well as part of the units. While the refund on account of the payment of octroi related to raw material is required to be taken as part of the business profits in respect of refund of octroi paid on units, it has to be excluded by the application of clause (baa). In respect of the income from technical services, if the amount shown by the appellant in Schedule XIII refers to the income as ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interfere with the order of CIT(Appeals). 15. As far as the grievance projected by the assessee in 2nd part of ground No.2 is concerned, we are of the view that the Head Office expenses has to be allocated to trading exports also. In this regard, we find that there is no material on record to come to the conclusion that trading export is an independent unit requiring no assistance from the Head Office. To this extent, the grievance projected by the assessee in 2nd part of ground No.2 in its appeal is rejected. 16. That leaves for consideration only first part of ground No.2 raised by the assessee viz., considering rental income, commission, notice pay, income from cancellation of orders and miscellaneous income as income falling within the ambit of Explanation (baa) of the Act. As far as notice pay, rental income, commission income, income from cancellation of order is concerned, similar issue was considered in assessee's own case in AY 1999-2000 in ITA No.3330/MUM/2004 (supra) and the Tribunal held as follows:- "12. As far as rent is concerned, it is the plea of the assessee that it takes on rent premises for use of employees and recovers a part of the cost from the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal for AY 1999-2000 (supra) should be followed and deduction u/s. 80HHC be computed accordingly. 18. As far as miscellaneous income is concerned, it was admitted by the parties before us that the said issue was decided against the assessee in the order of Tribunal for AY 1999-2000 (supra). The grievance projected by the assessee in the first part of ground No.2 is decided accordingly against the assessee. 19. There are certain new items of other income which are excluded by the AO under Explanation (baa) of section 80HHC viz., fees from group companies and networking charges. These are receipts for providing facilities to group companies and have to be regarded as falling within the ambit of Explanation (baa) to section 80HHC. 20. There is another item of income which is drawback on export. This is an item which will get reduced under the proviso to section 80HHC of the Act and will be again added after such exclusion. Therefore, this cannot be treated as an item of income falling within Explanation (baa) to section 80HHC. 21. Grounds No.(i) by the revenue and ground No.2 by the assessee are decided accordingly." 10. Being so, taking a consistent view, we direct acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce expenses. We are unable to agree with the aforesaid submission for two reasons. First reason is that it is the profit derived by the assessee from the business of industrial undertaking which has been made eligible for deduction u/s. 80IA d not any other profit. Second reason is that the computation of profits eligible for deduction u/s. 80IA has to be done in accordance with the provisions of section 28 to 43. Perusal of the aforesaid provisions reveals that all those expenses, which are incurred for the purposes of the business of the industrial undertaking, are to be allowed while computing the business profit. It cannot be said that Head Office expenses or common expenses are not incurred or are uncommon for the purposes of the business of the industrial undertaking. What is now required to be computed is the profits derived from the business of industrial undertaking Therefore, there is no warrant for the proposition that only those expenses, which are directly attributable to earning of profits derived from the business of industrial undertaking alone should be considered. As already stated above the profits eligible for deduction u/s. 801A are net profits derived from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for running the business. In that view of the matter, we uphold the order of CIT(Appeals) and dismiss ground No.1 raised by the assessee." 4. In the light of the aforesaid decision of the Tribunal, we are of the view that there is no merit in ground No.1 raised by the assessee and accordingly the same is dismissed." 13. Following the Tribunal order for AY 2000-01 and taking a consistent view, this issue is decided against the assessee. 14. Ground No.3 by the assessee is as follows:- "3. The Learned CIT (A) erred in confirming disallowance of the claim for deduction for a sum of Rs. 6,74,600/- being deduction claimed under section 80-0 at 50% of fees received for supply of engineering designs and drawings. It is submitted that the claim is for fees received for developing and providing designs and drawings, As per the provision of section 80 0 of the Income Tax Act design and drawings need not be registered for availing the deduction under the aforesaid section. In the facts and circumstances of the case your appellant is entitled for deduction u/s 80-0 for fees received in foreign currency." 15. This issue came up for consideration before the Tribunal in ITA No.3330/Mum/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5/day 175.00 b) Air Ticket Cost INR 33,205.00 - - 786.00 @ USD1 = Rs. 42.25. Total 2,361.00" 29. It appears from the invoices, especially the third invoice (dt. 28.07.98) that one Mr. S.K. Datta visited Taiwan in connection with the mechanical design drawing. It thus appears to be a case where the assessee was only rendering technical services for which it received consideration and did not supply any design for use by the foreign enterprise outside India. In fact, on similar grounds, the Tribunal in ITA No.3089/Mum/2003 in assessee's own case for the AY 1998-99, upheld the order of CIT(Appeals) with the following observations:- "10.5 We have heard the rival submissions and perused the materials on record. On a close observation of the reasoning of the CIT(A) in rejecting the assessee's claim, it is observed that the assessee's representative was specifically asked to furnish a copy of agreement entered into Swiss Company. However, the learned AR admitted that no such agreement existed in respect of services rendered and what has been claimed as deduction was merely on the basis of invoices raised for the purpose, T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that expenditure of Rs. 18,14,331/- being amount spend towards Repairs and renovation of Leasehold premises is capital expenditure." 18. This issue also came up for consideration before the Tribunal in ITA No.3330/Mum/2004 for AY 1999-2000 wherein similar ground was dismissed. Since the CIT(A) in the present case followed the earlier order of Tribunal, being so, we do not find any infirmity in the order of CITJA and the same is confirmed. 19. Ground No.5 reads as under:- "5. The Learned CIT (A) erred in disallowing a sum of Rs. 5,72,796/- being reversal of provision made for the obsolete stock in earlier years. It is submitted that Learned Assessing Officer & CIT (A) has disallowed the claim for deduction of provision made for obsolete stock. The reversal thereof (write back) should not be taxed again. It is submitted that it may be so held now." 20. This issue is with regard to provision for obsolescence. The AO made an addition of Rs. 1,26,08,347/- to the income towards provision for stock obsolescence, consistent with the stand of the Department for the AY 2000-01. During the proceedings before the CIT(A), it was explained that the total value of closing stock as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of the correct figure of Rs. 12,85,226/-. Likewise in respect of the Faridabad unit the provision during the year was shown at Rs. 51,06,000/- as against provision of Rs. 3,00,000/-. Subsequently the corrected figure was given. The AO proceeded on the basis of the original figures. The correct position with regard to opening balance, the provision made during the year and the closing balance in the obsolescence account is given below : Location Opening Provision for obsolete inventory as on Fresh Provision created/(Reversed) during the year 1/4/00 to 31/3/01 Closing provision as on 31/3/01 Andheri 8,375,143 1,285,226 9,660,369 Faridabad 4,806,000 300,000 5,106,000 Maneja 21,528,121 1,875,787 23,403,908 Nasik 8,479,225 -987,825 7,491,400 Chennai 1,613,000 - 1,613,000 Peenya 66,951,049 -3,045,984 63,905,065 Total 111,752,538 -572,796 111,179,742 24. On verification, the CIT(A) was of the view that the mistake happened in respect of Andheri and Faridabad unit. The closing balance in the provision account was shown as provision made during the year ignoring the opening balance. To sum up there is a reversal in the provision account as under :- Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investments that yielded tax-free dividend income. In such circumstances, we are of the view that the revenue authorities were not right in concluding that the borrowed funds on which interest was paid was used for the purpose of making investments that yielded tax-free dividend income. In that view of the matter, we are of the view that the addition made by the revenue authorities cannot be sustained. The same is directed to be deleted." 30. The facts in AY 1999-2000 being identical in the case before us, we delete the addition on similar reasoning. 31. The next ground (No.7) by the assessee reads as under:- "7. The Learned CIT (A) erred in confirming the disallowance of the sum of Rs. 20,264,477/- being provision made for loss order on the ground that same is contingent in nature and there is no scope for allowance of any liability that is unascertainable. It is submitted that your appellant has provided for loss likely to be incurred on the execution of the particular order. As per the accounting standard on accounting for the contracts, it is mandatory to made provision for the loss order based on the technical and commercial evaluation of the contract and it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce reliance on Accounting Standard-7 of the Institute of Chartered Accountants of India (ICAI) which provides in paragraph-21, 31 and 35 that when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately. In so far as the statutory recognition of AS-7 of ICSI is concerned, it is admitted position that the said AS has not been notified u/s.145 of the Act as an Accounting Standard. The learned counsel for the Assessee however sought to argue that AS-1 is an accounting standard notified u/s.145 of the Act as an AS applicable for AY 2000-01 and therefore the principle of prudence mentioned in the said AS- 1 will be applicable which provides that anticipated losses should be considered while arriving at the profit of the Assessee. He placed reliance on the decision of the ITAT Mumbai Bench in the case of Jacobs Engineering (India) Pvt. Ltd. Vs. ACIT (2011) 14 taxmann.com 186(Mumbai) in which it was held that foreseeable loss has to be allowed as deduction provided the calculation and quantification of such loss is acceptable and in terms of AS-7. That case related to AY 2002-03 & 2003-04 when AS-7 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited by the learned Standing Counsel for the Department is in the context of provision for warrant which is not applicable to the facts of the case of the Assessee in this appeal and in the context of claim for allowing anticipated loss. 44. We have given a careful consideration to the rival submissions. In our view when the AO says that the loss in question is contingent he is deemed to have questioned the basis on which the Assessee has quantified the loss. Without assigning a basis on which the loss is said to be accrued loss, the Assessee cannot claim deduction on account of foreseeable loss. We deem it fit and proper to remand the issue to the AO for fresh consideration with a direction that the Assessee will furnish the basis on which he claims that there would be loss in the three contracts, the details of which are given above. The AO will consider the same and decide the issue afresh in accordance with law after affording Assessee opportunity of being heard. 34. On similar reasoning as in Tribunal's order for AY 2000-01, we set aside the issue to the file of AO for reconsideration. 35. Ground No.8 by the assessee is as follows:- "8. The Learned CIT (A) erred in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the bad debts and also individual details in respect of debts exceeding Rs. 2 lakhs. Examination of the details revealed that the claim of bad debts included advances written off and commission receivable written off. A major component of the bad debt related to penalty and liquidated damages as a consequence of deficiency and delay in delivery of material. A test check showed the deduction had been made by the parties. In some of the cases amounts have been due for over a decade. The AO also conducted detailed enquiries with KEB, now KPTCL who had levied two penalties as under : 1) In respect of PO No.9108 dated 24/6/94 : Rs. 3,20,487/- 2) In respect of PO No.9519 dated 9/11/94 : Rs. 1 1,13,565/- 38. The AO found that KPTCL confirmed that the deductions had been made as a penalty. He however was of the view that these amounts represented liquidated damages and penalty relating to trade. At best the same can be allowed as a business loss. The AO also pointed out that the following items cannot be treated as bad debt. : 1) ABL Ltd. : Rs. 7,08,844/- 2) ABL, Germany : Rs. 1,64,660/- 39. These amounts are advances paid to group companies for services to be rendered. Advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group. It is further pointed out that no division would like to show a loss by writing off dues since the premium is on performance. 45. During the appellate proceedings the company was asked to file the location wise chart showing the volume of the debts written off which was provided as under:- SUMMARY Nature Total Nos Total Amount Late Delivery 279 71,398,699 Dispute of taxes 11 3,285,756 Freight not paid/freight 3 45,699 Others 12 5,323,047 Technical disputes 6 2,908,918 Liquidity problem/co. do not exist 2 1,711,555 Total 313 84,673,674 It was stated that in respect of smaller bad debts full details are not available. 46. On the first issue as to whether a tax payer can write off any debt, the CIT(A) relied on the decision of full Bench of ITAT in the case of Oman International Bank Corporation 2006-TIOL-118-ITAT-MUM-SB. In that case the ITAT agreed with the interpretation that even after the amendment, only bad debts can be written off. The tax payer has to establish the bonafides of the write off. The CIT(A) observed that the proposal and procedure for write off involves an elaborate decision making process at various levels starting with the fiel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to liquidation. Even then the amount cannot be written off because the deposits were not made during the course of business and the deposits had not come out of income charged to tax in any earlier year. The AO was therefore directed to disallow the total sum of Rs. 53,23,247 which includes the above sums. 48. Regarding the age of debts written off, the CIT(A) noted that some of the debts written off are extremely old dating back to the 1980's. For instance on account of late delivery there are six items relating to transactions prior to 1982 amounting to Rs. 20,02,229/-. Likewise under 'others', there are two items relating to the period 1980-1982 aggregating Rs. 10,25,000/-. The representatives were asked to explain this unusual occurrence in the context of the claim that debts are regularly reviewed and written off every year. It was explained that once supplies are made the buyer could make deductions on account of a number of factors such as deficiency in quality, late delivery etc. As a policy, the company pursues the matter with the buyer to recover as much as possible. It is only when all hopes of recovery stand eliminated that the debt is eventually written of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary for the assessee to establish the fact that the debt in fact had become irrecoverable and it is sufficient if the bad debt is written off as irrecoverable in the books of account of the assessee. 52. In the facts of the case, twin issues viz., (i) whether debt which was written off during the relevant year was offered to income in Previous year or earlier years, (ii) whether the assessee has debited the amount of doubtful debt to profit and loss account and has reduced the same from the asset side of the balance sheet require determination to decide the claim of the assessee with regard to writing off the bad debt. The Supreme Court dealt with Section 36(1)(vii) of the Act, which was amended with effect from 1-4-1989 in Southern Technologies Ltd. 320 ITR 577 (SC). It was inter alia held that after 1-4-1989, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii) of the Act. It was further held that if an assessee debits an amount of doubtful debt to profit and loss account and credits the asset account like sundry debtors account, it would constitute a right of an actual debt. However, if an assessee debits 'provision for doubtful debit& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the CIT(Appeals) is based on the decision of the Hon'ble Supreme Court in the case of Continental Construction Co. Ltd. (supra). In the decision in the case of Continental Construction Limited (supra), the Hon'ble Supreme Court pointed out as to how Section 80HHB of the Act should be interpreted. It was held that Section 80HHB of the Act should not be interpreted in a narrow or pedantic fashion, as the Section provides for an exemption in respect of profits for a foreign project undertaken outside India in the course of business. The Hon'ble Apex Court further held that the expressions "business of execution of a foreign project" or work forming part of it or the 'profits derived' from the business, take in all aspects of a business involving the activities referred to in Sub-Section (2)(b) of Section 80HHB of the Act together with all activities, commitments and obligations ancillary and incidental thereto and the profits flowing therefrom. It was also held that the definition cannot be restricted to the mere physical activity or putting up the superstructure, machinery or plant, but should be understood to take within its fold all utilization of technical knowledge or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35(I)(iv) when the activity claimed to be the R&D activity is part of normal business of the assessee." 64. The above amount represents capital expenditure on R&D activity and the claim has been made u/s.35(1)(iv). Consistent with the stand for AY 2000-01 the AO held that no research activity was conducted by the assessee and therefore deduction u/s.35(1)(iv) could not be allowed. The CIT(A) observed that the issue has been decided in favour of the assessee by the CIT(A)-VIII, Mumbai in his appellate order for AY 2000-01. During the proceedings all the details relating to research activity have been filed in the paper book. It is seen that the R&D Division has been approved by the Department of Scientific Industry Research. The approval initially granted has been extended up to 31/3/06. The details at pages 106, 107 relate to the projects in progress and the status of each research project. Under company law necessary disclosure has to be made in the accounts. The assessee has also filed copies of the status reports in respect of each project. Considering the above and following the decision of the CIT(A) for AY 2000-01, the AO was directed to allow R&D expenditure at Rs. 2,85, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no change in the facts. That being the case following the decision of the CIT(A) for AY 2000-01 the addition made was deleted for the CIT(Appeals). Aggrieved, the revenue is in appeal before us. 70. The Tribunal dealt with this issue for the AY 2000-01 and vide para 72 decided the issue against the revenue as follows:- "72. We have given a careful consideration to the rival submissions and are of the view that the order of the CIT(A) on this issue has to be upheld. Admittedly the method of accounting followed by the Assessee was consistent and accepted in the past by the revenue authorities. There is no reason why the same should be disturbed. The decision in the case of Abdul Latif (supra) supports the plea of the Assessee. In the said decision, the facts were that the Assessee was engaged in business of manufacture of papers. In return of income for AY 2005-06, assessee had shown, inter alia, purchases of packing material as on 31-3-2005, but no amount of packing material was shown in closing stock. The Assessee submitted before Assessing Officer that; (i) packing material shown as purchases as on 31-3-2005 was actually purchased in earlier months and such packing mat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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